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Economy and Industry
Analyses
UNIT6 ECONOMY AND
INDUSTRY ANALYSES
Objectives

The objectives of this unit are to:

• Explain the relevance of economy and industry analyses for equity investment
decision
• Discuss the usefulness of these analyses in an efficient market setup
• Highlight a framework of analysis of economy-industry-company
• Suggest steps that could form part of the economy and industry analyses
• Discuss various techniques to evaluate different economy and industry related
factors.

Structure
6.1 Security Analysis and Investment Decision
6.2 Fundamental Analysis
6.3 Fundamental Analysis and Efficient Market
6.4 Economy-Industry-Company Analysis: A Framework
6.5 Economy Analysis
6.6 Measures of Economic Activity
6.7 Economic forecasting
6.7.1 Anticipatory Surveys
6.7,2 Barometric or Indicator Approach
6.7.3 Economic Model Building Approach
6.8 Industry Analysis
6.8.1 Techniques of industry Analysis
6.9 Summary
6.10 Self-assessment Question/Exercises
6.11 Further Readings

6.1 SECURITY ANALYSIS AND INVESTMENT

DECISION
In Unit 3 of Block I, we briefly reviewed the need for economy and industry analyses
in investment decision, It was emphasized that the starting point of any investment
decision is evaluation of future economic performance. There is no point in investing
in stocks or any other form of risky investments when the future performance of the
economy is not expected to be good. For instance, stock market all over the world
suffered major loss during the year 2000 and 2001 when the U.S. economy reported
slowdown in the economic growth. Stock prices have crashed more than fifty percent
during this period. Economy analysis also assumes importance for allocation of
capital between equity investments and government securities. Many of us would like
to invest in government securities or schemes of government, which are not exposed
to price variation risk during the period of economic downtrend. In this unit, we will
discuss more on techniques used in evaluating future economic performance. Another
critical factor taken by the investors while investing
5
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Securities Market in is the outlook of different industries. While economic performance in general influence
India the outlook of industries, its impact on industries differs from industries and industries.
For instance, some industries are affected more adversely when the economy is doing
badly whereas few other industries do well during the second half of the economic
recovery. The price and return of such stocks are also affected accordingly. Investors
would normally distribute their wealth to different industries based on expected return
and current price of stocks in the industry. It may not be always profitable to buy stocks
of industries, which are expected to do well in the near future. On the other hand,
investors may receive more benefit by investing in stocks of industries, which are not
doing well currently but likely to perform well once the economy picks up well. Such
stocks may be available at much lower price compared to stocks of industries, which
are presently doing well. In this unit, we will discuss different classifications of
industries based on the relationship between economic performance and performance
of industries. We will also discuss different phases of industries and their impact on
valuation. In addition, the sources of information to perform economic and industry
analyses will be covered. We will begin our discussion with a broader framework of
these analyses called fundamental analysis.
6.2 FUNDAMENTAL ANALYSIS
Investment decision-making being continuous in nature should be attempted
systematically. Broadly, two approaches are suggested in the literature. These are: (i)
Fundamental Analysis, and (ii) Technical Analysis. In the first approach, the investor
attempts to look at fundamental factors that affect risk return characteristic of the
security. In the second approach, the investor tries to identify the price trends, which
reflect these characteristics. The technical analysis concentrates on demand and supply
of security and prevalent trend in share price measured by various market indices in the
stock market.
Economic and industry analyses are part of fundamental analysis. In the fundamental
approach, various fundamental or basic factors that affect the risk-return of the
securities are examined. Effort, here, is to identify those securities, which are perceived
to be mispriced in the stock market. The assumption in this case is that the `market
price' of the security and the price as justified by its fundamental factors called
`intrinsic value' are different and the market place provides an opportunity for a
discerning investor to detect such discrepancy. The moment such a discrepancy is
identified the decision to invest or disinvest is taken. The decision rule under this
approach is as follows:
If the price of a security at the market place is higher than the one, which is justified by
the security's fundamentals, sell that security. This is because, it is expected that the
market will sooner or later realise its mistake and reduce its price. Therefore, before the
market realise its mistake and price that security properly, a deal to sell this security
should be struck in order to reap the profits. But, if the price of that security is lower
than what it should be based on its fundamental, it should be bought before the market
corrects its mistake by increasing the price of security in question. The price prevailing
in the market is called `market price' (MP) and the one justified by its fundamental is
called `intrinsic value' (IV).
Decision Rule Recommendation

(1) If IV > MP, Buy the Security

(2) If IV < MP, Sell the Security
(3) If IV = MP, No action
The fundamental factors mentioned above may relate to the economy or industry or
company or all/some of them. Thus, economy fundamentals, industry fundamentals
and company fundamentals are considered while analysing the security for taking
investment decision. In fact the economy-industry-company framework forms an
integral part of this approach. As explained earlier, the analysis requires collection of
large amount of data relating to economy, industry and company for any meaningful
analysis. This framework can be properly utilized by suitable adjustments in a particular
context. For instance, a fund manager of a large mutual fund can move from economy
to industry and then company analysis whereas a small investor can spend more time
6 on fundamental analysis. Such analysis helps the investors to take an informed and
considered investment decision.
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6.3 FUNDAMENTAL ANALYSIS AND EFFICIENT Analyses
MARKET
Fundamental analysis is not free from criticism. It is pertinent to mention that doubts
are expressed about the utility of this approach in the context of efficient stock
market, which already incorporates the information about the economy, industry and
company in the share price. It is claimed that stock market incorporates such
information in the share price rather instantaneously. The result of this assumption is
that price prevailing at the market place can be taken to represent the price of the
share justified by its fundamental i.e., intrinsic value (IV). The equality of MP and IV
makes the fundamental analysis or any other analysis useless or redundant. The above
given view about share market efficiency implies that no one would be able to make
abnormal gains given such a set up. Some research studies in the literature also
support the above view. Practitioners, however, do not agree to such conclusions of
empirical nature. We will discuss more on efficient market hypothesis and its impact
on security valuation in Unit 9.
Once again let us clear at this stage that the truth lies in between these two extreme
position-denouncing security analysis as totally redundant to the one that would bring
us profits. In fact, stock market is not efficient to the extent the researchers proclaim.
There are many operational inefficiencies and structural deficiencies in stock market.
Though the market is fairly efficient in the long run in a sense that only information
leads price changes, operational and structural inefficiencies cause time lag between
arrival of information and its impact on the security prices. In this context, analysis still
has an important role to play. It is paradoxical but correct to say that one has to assume
that stock market is inefficient to make it efficient. It is only then the processing of
information relating to economy-industry company would take place that would allow
the stock market to reflect the information in the price quickly if not instantaneously. It
is a fact of life that earning abnormal profits is not the only and final goal for most of
the investors. Rather, it has been observed that earning the normal returns, (i.e., the
return commensurate with risk prevalent in the market) is a worthwhile objective to
pursue, which most of the investors are not even able to achieve. In nutshell,
fundamental analysis has an important role to play for making investment decisions
in an efficient set up, too.
6.4 ECONOMY-INDUSTRY-COMPANY ANALYSIS : A
FRAMEWORK
The analysis of economy, industry and company fundamental as mentioned above is
the main ingredient of fundamental approach. The analysis should take into account
all the three constituents which form different but crucial steps in making investment
decision. These can be looked at as different stage in the investment decision, making
process and are depicted graphically with three concentric circles as shown in Fig 6.1
below. The process of investment analysis starts with an evaluation of economic
outlook. After getting some confidence on economic outlook, the analysis is moved
to industry specific to identify industries, which are worth for further analysis to pick
up good stocks. The last stage is identifying specific stocks from selected industry.
Operationally, to base the investment decision on various fundamentals, all the three
stages must be taken into account. In this unit, we will concentrate on economy and
industry analyses while in the next Unit, we will focus on the company level analysis.

7
Figure 6.1 : Investment Decision making process.
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Securities Market in
India
6.5 ECONOMY ANALYSIS
All investment decisions are made within the economic environment after taking into
account the economic prospect of the country. This environment varies as the
economy goes through stages of prosperity. Why economy fails to have prosperity
forever? There are several reasons. Often, when the economy is booming, companies
over invest in projects and create excess capacity and thus lead-to slow down of the
economy. Further, government policies and external pressures also create
complications to the economy. For instance, increase in oil prices on account of gulf
war or war with neighboring countries creates pressures to the domestic economy.
Government also can create problems to the economy by following wrong policies or
failure to adopt right policies like failure in meeting disinvestment target. Different
stages of economic prosperity are also referred to as the business cycle. The term
cycle doesn't mean that there is some orderliness in the economic sequence such as
the seasons of the year. The economy doesn't follow a regularly repeated sequence of
events. It simply means how economic output and growth moves from period one to
next periods. If the initial period is a period of rabid growth, it peaks out at some
point of time and a recession sets in subsequently. After some point of slow growth,
the economy bottoms out but by then, new demand accrues and fresh activities
emerge. The economy now sets into recovery mode and then gets into expansion. The
cycle moves on without any definite length of time between the stages because
government and other agencies would like to extend the expansion stage while trying
to cut down the recession or speed up the recovery phase. Figure 6.2 illustrates the
common characteristics that are applicable to different business cycles.

Figure 6.2 : Phases of the Business Cycle

Starting from a point of neutrality (t 1 ), the economy expands and reaches peak (t2).
The economy then declines, reaching a trough at t3 and subsequently starts to rebound
to repeat the pattern. As mentioned earlier, economists all over the world have
developed a fair amount of understanding on factors leading to different phases of the
economy and also developed necessary monetary and fiscal policies to speed up the
process of recovery and extend the period of expansion. Despite such efforts, the
government fails to achieve desired results because of new factors emerging in the
economy and ever-changing social arid political events.

6.6 MEASURES OF ECONOMIC ACTIVITY

The critical issue before investors is to assess the future of economic activity so that
she or he can take an investment decision. It is possible by forecasting a few widely
used economic measures. A discussion on such economic measures will be useful
8 before discussing the forecasting techniques.
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Economy and Industry
Gross Domestic Product : Economic activity is measured by aggregate indicators Analyses
such as the level of production and national output. The most widely and commonly
quoted measure is Gross Domestic Product (GDP), which is the total value of all final
good and services newly produced within the country's boundaries with domestic
factors of production. Cars made within the country by companies like Hundai are
included in the GDP A similar measure is Gross National Product, which measures
the total value of all final goods and services newly produced by an economy and
includes income generated abroad. GDP or GNP and particularly the growth rate of
GDP or GNP are relevant for investment for two reasons. One, a good GDP growth
means continuous income for individuals and hence surplus money can be deployed
for investments. Two, corporate growth is directly influenced by the GDP growth. In
Table 6.1 and 6.2, the GDP values along with several other important economic
indicators are given. The growth rate of GDP at factor cost from year 1951-52 to
2000-01 is given in Figure 6.3. The growth rate is showing high level of volatility
reflecting economic cycles. Against the average growth rate of 11.41%, the standard
deviation is 5.90%. After the initiation of economic reforms in 1992, the growth rate has
picked up initially but subsequently declined on account of competition from external
market.

Table 6.1 : Macro-Economic Aggregates

(At current prices)
New Series (Base : 1993-94) (Rupees in crore)
Year Population GDP at Consump Indirect GDP at Net factor
(million) factor of tion of Taxes less market Income
cost fixed capital subsidies pries abroad
1 2 3 4 6 7 9
1950-51 359 9547 364 387 9934 -41
1951-52 365 10080 411 486 10566 -35
1952-53 372 9941 442 425 10366 -25
1953-54 379 10824 465 458 11282 -19
1954-55 386 10168 511 510 10678 -29
1955-56 393 10332 546 541 10873 -10
1956-57 401 12334 611 617 12951 -17
1957-58 409 12610 662 739 13349 -20
1958-59 418 14106 772 768 14874 -35
1959-60 426 14816 843 859 15675 -57
1960-61 434 16220 944 947 17167 -72
1961-62 444 17116 1058 1080 18196 -98
1962-63 454 18302 1164 1264 19566 -108
1963-64 464 20916 1313 1566 22482 -112
1964-65 474 24436 1477 1784 26220 -145
1965-66 485 25586 1671 2082 27668 -164
1966-67 495 29123 1975 2182 31305 -230
1967-68 506 34225 2222 2424 36649 -258 9
1968-69 518 36092 2416 2731 38823 -255
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Securities Market in Year Populati GDP at Consump Indirect GDP at Net
India on(milli factor of tion Taxes less market factor
on) cost Fixed subsidies prices income
capital abroad
1 2 3 4 6 7 9
1969-70 529 39691 2678 3'059 42750 -271
1970-71 541 42222 2970 3455 45677 -284
1971-72 554 44923 3292 4009 48932 -291
1972-73 567 49415 2721 4532 53947 -302
1973-74 580 60560 4339 5053 65613 -325
1974-75 593 71283 5560 6196 77479 -291
1975-76 607 75709 6449 7560 83269 -255
1976-77 620 81381 6907 8358 89739 -233
1977-78 634 92881 7497 8716 101597. -233
1978-79 648 99823 8573 10310 110133 -156
1979-80 664 108927 10449 11914 120841 153
1980-81 679 130176 12288 13586 143762 345
1981-82 692 152056 14708 16544 168600 40
1982-83 708 169525 17175 18737 188262 -634
1983-84 723 198630 19565 20866 219496 -944
1984-85 739 222705 22487 22810 245515 -1424
1985-86 755 249547 26717 28444 277991 -1429
1986-87 771 278258 30389 32919 3111.77 -1805
1987-88 788 315993 33974 38350 354343 -2619
1988-89 805 378491 39693. 43076 421567 -4496
1989-90 822 438020 46560 48159 486179 -5731
1990-91 839 510954 53264 57720 568674 -7545
1991-92 856 589086 64402 64031 653117 -10077
1992-93 872 673221 74512 '75146 748367 -11645
1993-94 891 781345 83353 77875 859220 -12080
1994-95 908 917058 97994 95712 1012770 -13083
1995-96 927 1073271 117926 114741 1188012. -13484
1996-97 943 1243546 136503. 124662 1368208 -13082
1997-98 959 1390042 152050 132399 1522441 -13205
1998-99 P 975 1616033 166609 142243 1758276 -14968
1999-00 QE 991 1786459 180727 170538 1956997 -15431
2000-01 RE 1007 1978042

Source: RBI website: www.rbi.org.in

Table 6.2 : Macro-Economic
Aggregates
(At current prices)
New Series (Base : 1993-94)
(Rupees in crore)
Year GNP GNP Per capita Private Govt. Personal-
at at GNP at final con- final con- disposable
factor market factor cost sumption sumption income#
cost prices (Rupees) expen- expen -
diturediture
(PFCE)(GFCE)
1 10 11 12 13 14 15
1950-51 9506 9893 265 . 592 8876
1951-52 10045 10531 275 . 621 9325
1952-53 9916 10341 267 . 643 9275
1953-54 10805 11263 285 . 679 10137
1954-55 10139 10649 263 . 708 9402
1955-56 10322 10863 263 . 759 9574
1956-57 12317 12934 307 . 837 11435
1957-58 12590 13329 308 . 978 11691
1958-59 14071 14839 337 . 1049 13049
10 1959-60 14759 15618 346 . 1105 13660
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Economy and Industry
Year GNP GNP Per Privat Govt. Personal Analyses
at at capita final con-final con- disposab
factor market GNP sumption sumption le
cost prices factor expen- expen - income#
cost at diture diture
(Rupees) (PFCE (GFCE)
1 10 11 12 14 15
1960-61 16148 17095 372 16166 1206 14638
1961-62 17018 18098 383 16905 1336 15358
1962-63 18194 19458 401 17804 1620 16320
1963-64 20804 22370 448 19766 2088 18552
1964-65 24291 26075 512 23269 2240 21936
1965-66 25422 27504 524 24562 2570 22975
1966-67 28893 31075 584 28606 2808 26260
1967-68 33967 36391 671 34090 3126 31137
1968-69 35837 38568 692 34106 3428 32716
1969-70 39420 42479 745 36893 3847 35775
1970-71 41938 45393 775 39141 4289 37891
1971-72 44632 48641 806 42215 4982 40126
1972-73 49113 53645 866 46529 5283 44431
1973-74 60235 65288 1039 56091 5765 54741
1974-75 70992 77188 1197 67957 6995 63642
1975-76 75454 83014 1243 69498 8265 67810
1976-77 81148 89506 1309 72256 9192 72330 ,
1977-78 92648 101364 1461 83205 9780 83635
1978-79 99667 109977 1538 90492 10852 89680
1979-80 109080 120994 1643 98264 12481 97634
1980-81 130521 144107 1922 119024 14492 120642
1981-82 152096 168640 2198 137220 17075 138869
1982-83 168891 187628 2385 147625 20135 153126
1983-84 197686 218552 2734 174386 232I6 181359
1984-85 221281 244091 2994 191619 26631 202245
1985-86 248118 276562 3286 209890 31734 224371
1986-87 276453 309372 3586 232958 37507 250920
1987-88 313374 351724 3977 260195 43990 286328
1988-89 373995 417071 4646 299255 50673 340292
1989-90 432289 480448 5259 338750 57909 392223
1990-91 503409 561129 6000 387137 66030 461192
1991-92 579009 643040 6764 446262 74285 527018
1992-93 661576 736722 7587 500980 83957 611390
1993-94 769265 847140 8634 574772 97725 707692
1994-95 903975 999687 9956 664157 108639 834764
1995-96 1059787 1174528 11432 765797 128816 949191
1996-97 1230464 1355126 13048 903653 145725 1127541
1997-98 1376837 1509236 14357 974795 172189 1249877
1998-99 P 1601065 1743308 16421 1141207 211770 1480283
1999-00 QE 1771028 1941566 17871 1265432 251516 1649228
2000-01 RE 1961279 19476 --
Source: RBI website: www.rbi.org.in
Measures of Consumer Confidence: This type of survey is not available
unfortunately in India at this stage. Consumer confidence index is one of the strong
short-term economic indicators used by the investors to assess whether there is any
change of direction in the economy. Consumer confidence affects spending, which
has an impact on corporate profit and levels of employment. A positive change in the
consumer confidence index or consumer sentiment index in the U.S. indicates a strong
impact on the profitability of firms in general and in particular for firms dealing with
consumer items. There is yet another index in the U.S., which captures the
confidence level of purchase managers of firms in the U.S. Since such surveys are
not conducted in India, what is useful is estimate of personal disposable income.
Figure 6.4 shows the growth rate of personal disposal income during the period. A
correlation analysis between GDP growth rate and Personal Disposal Income shows a
strong correlation of 98. 11
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Securities Market in
India

Inflation or Consumer Price Index: In addition to aggregate measures of economic

activity and leading indicators, measures of inflation can have an important impact on
investors' behavior. Inflation in general denotes a general change in the price levels and
measured in terms of index. Two commonly used indexes are Consumer price index
(CPI) and the Wholesale price index (WPI). You can see the weekly measures of WPI
on every Monday in any economic dailies with a commentary. Table 6.3 shows the
WPI and CPI values since 1970-71. You may observe after a high level of inflation till
1998-99, the inflation has come under control. What is the impact of inflation on stock
market. Inflation in general is not bad as long as it comes along with the growth of the
economy. When the economy is expanding fast, it is natural that money supply also
increases along with disposable personal income of individuals and thus cause an
increase in prices. Under this condition, stock market is favorably affected on account
of increase in profitability of firms. Nevertheless, inflation affects interest rates and
hence adversely affects the stock prices. An increase in rate of inflation will cause an
increase in rate of interest of all kinds of securities. An increase in interest rate affects
the value of stock as well as other securities in two ways. One, it affects' adversely the
profitability of firms because of higher outflow on interest cost. Two, it also increases
the expected rate of return of investors and directly affects the discount rate. An
increase in discount rate has an adverse impact on value of securities of different types.
Such an adverse impact may ultimately lead to a recession and hence governments and
central banks are concerned with inflation. A typical reaction from the central banks (in
our case Reserve Bank of India) is controlling money supply through appropriate
monetary policies. A reduction in money supply through increase in CRR or SLR or
increasing bank rate will reduce the heat of the economy and thus cool down the prices.
After reaching necessary correction, the central bank of the country relaxes the norms
so that the economic activity continues without any break.
Table 6.3: Wholesale and Consumer Price Index
Year WPI CPI

Base 1970-71

1970-71 100.00 186.00

1971-72 105.60 192.00
1972-73 116.20 207.00
1973-74 139.70 250.00
1974-75 174.90 317.00
1975-76 173.00 313.00
1976-77 176.60 301.00
1977-78 185.80 324.00
1978-79 185.80 331.00
1979-80 217.60 360.00
1980-81 257.30 401.00
12 1981-82 281.30 451.00
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Economy and Industry
Analyses

Source: www.rbi.org.in # Base 1981-82=100

Interest Rates : The level of interest rates is perhaps the most important macro
economic factor to consider in one’s invest analysis. Forcasts of interest rates
directly affect the forecast of returns in the fixed income market. Suppose you expect
the interest rates to decline in the near future. Under this situation, you will shy away
from investing in long-term debt instruments. Thus, a superior technique to forecast
rates would be immerse value to an investor attempting to determine the best asset
allocation for his or her portfolio. The following factors would help investors in
forcasting the future direction of the interest rates:
1. The supply of funds from savers, primarily households.
2. The demand for funds from businesses to be used to finance physical
investments in plant, equipment, and inventories.
3. The monetary policy of the Reserve Bank of India
4. The expected rate of inflation.
There is a close linkage between the above variables. For instances, the supply of
funds from savers depends on the level of economic growth. The same economic
growth determines the demand for funds from businesses. The monetary policy of
RBI is the outcome of inflation and inflation of the country is influenced by monetary
policy as well as economic performance. The Government and the Central Bank
influence the interest rates significantly. For example, an increase in the
government’s budget deficit increases the government borrowings. An increase in the
demand for funds pushes the interest rates. The Central Bank can reduce the impact
of government borrowing by increasing the supply of money through monetary
policy. While this will temporarily arrest an increase in the interest rates, increased
money supply pushes the inflation, which in turn increases the interest rates. Many
times, the Central Bank also uses interest rates directly to control the economy. For
instance, the U.S. Federal Reserve during the period 2000-2001 has cut down the
bank rate several times in order to boost the economy. Many countries including
Reserve Bank of India has reduced the interest rate during this period. Table 6.5
shows the interest rate prevailing in the Indian economy during the period of 1970-71 13
to 2000-01. Though an
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Securities Market in increase in interest rate should have an adverse effect on the market and vice versa,
India the impact of interest rate changes on stock prices in the real world is difficult to
forecast. For instance, interest rates were high during the period of 1991-93 period but
the stock market reached the peak during the same period. Though interest rates have
declined significantly during the last two years, the market remained depressed.
Table 6.4: Prime Lending Rate of IDBI and Advance Rate of SBI
Year Prime Lending Rate Advance Rate
IDBI SBI
1970-71 8.50 7.00-8.50
1971-72 8.50 8.50
1972-73 8.50 8.50
1973-74 9.00 8.50-9.00
1974-75 10.25 9.00-13.50
1975-76 11.00 14.00
1976-77 11.00 14.00
1977-78 11.00 13.00
1978-79 11.00 13.00
1979-80 11.00 16.50
1980-81 14.00 16.50
1981-82 14.00 16.50
1982-83 14.00 16.50
1983-84 14.00 16.50
1984-85 14.00 16.50
1985-86 14.00 16.50
1986-87 14.00 16.50
1987-88 14.00 16.50
1988-89 14.00 16.50
1989-90 14.00 16.50
1990-91 14.00-15.00 16.50
1991-92 18.00-20.00 16.50
1992-93 17.00-19.00 19.00
1993-94 14.50-17.50 19.00
1994-95 15.00 15.00
1995-96 16.00-19.00 16.50
1996-97 16.20 14.50
1997-98 13.30 14.00
1998-99 13.50 12.00-14.00
1999-00 13.60-17.10 12.00
2000-01 14.00 11.50
2000-01 12.00 11.50

Source: www.rbi.org.in
Government Policy: The government has two broad classes of macro economic tools -
those that affect the demand for goods and services and those that affect their supply.
For most of postwar history, demand-side policy has been of primary interest. The
focus has been on government spending, tax levels, and monetary policy. Since
1980s, however, increasing attention has been focussed on supply-side economics.
Broadly interpreted, supply-side concerns have to do with enhancing the productive
capacity of the economy, rather than increasing the demand for the goods and
services the economy can produce. In practice, supply-side economists have focussed
on the appropriateness of the incentives to work, innovate, and take risks that result
from the system of taxation. The thrust is creating infrastructure and skills among
people to increase the economic activity. Such polices may have little impact in the
short run but they produce sustainable long-run growth in the economy.
Fiscal Policy: Fiscal policy refers to the government's spending and tax action and is
part of demand-side management. It is the most direct way to influence the economy.
For instance, when the government increases spending, it creates more demand in the
economy and similarly, when the government reduces spending, it causes slow down
14 in the economy. It must be noted that government is a major' direct buyer of several
core sector products. The
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Economy and Industry
government can also increase or decrease t h e demand for the products by reducing Analyses
or increasing the tax rates. Changes in tax rates directly increase or decrease the
disposable income of the public. Though fiscal policy has a direct and immediate
impact on the economy, it takes a long time to frame such policies on account of
political compulsion. For instance, it took several years for the Indian policy makers
to reduce tax rates and fiscal deficit.
Monetary Policy: Monetary policy, in the form of changing CRR and SLR i s also
demand-side management of economy. T h e Central Bank changes the money
supply (rather adjust the growth rate of money supply) through variety of polices and
thus influence the economy. One of the reasons for inflation being under control
during the last two years is slow down in the growth of money supply. Table 6.5
provides money supply in the economy and bank rate prevailing at various point of
time. If it increases the money supply, it will fuel the growth in the short-run but
causes inflation and higher interest rate in the long-run. Similarly, the Central Bank
by reducing the money supply can slow down the growth and prevent the economy to
create over capacity in several industries. However, monetary policy affects the
economy in more roundabout way than fiscal policy.
Table 6.5: Money Supply and Bank Rate in the economy

Rs. in crones

15
Source : RBI Website
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Securities Market in
India
6.7 ECONOMIC FORECASTING
In order to perform economic analysis, it is essential to forecast economic performance
with the help of some of the economic factors discussed in the previous section.
Depending upon the duration, forecasting can be made for short term, intermediate and
long term. Short term refers to a period up to three years. Sometimes, it can also refer
to much shorter period, such as quarter or a few quarters. Intermediate period refers to
a period of three to five year period. Long term forecasting refers to the forecasting
made for more than five years. This may mean a period of ten years or more. We will
discuss some short term forecasting techniques in the following sections:

6.7.1 Anticipatory Surveys

This is a very simple method through which investor can form their opinion]
expectations with respect to the future state of the economy. As is generally
understood, this is the survey of expert opinions of those who are prominent in the
government, business, trade and industry. Generally, it incorporates expert opinion
with regard to construction activities, plant and machinery expenditures, level of
inventory, etc, which have important bearing on the economic activities. Anticipatory
surveys can also incorporate the opinion or future plan of consumer with regard to
their spending. So long as people plan and budget their expenditure and implement
their plans accordingly such surveys should provide valuable input as a starting point.
Despite the valuable inputs provided by this method, care must be exercised in using
the information generated through this method. Precautions are needed because:
1. Survey results can not be regarded as forecasts per se. A consensus of opinion
may be used by the investor in forming his own forecasts.
2. There is no guarantee that the intentions of surveys would certainly materialize.
To this extent, the investors can not rely solely on these.

6.7.2 Barometric or Indicator Approach

In this approach, various types of indicators are studied to find out how the economy
is likely to perform in the future. For meaningful interpretations, these indicators are
classified into leading, roughly coincidental, and lagging indicators.
Leading Indicators: As the name suggests, these are indicators that lead the economic
activity in terms of their outcome. That is, these are those time series data of the
variables that reach their high points as well as their low points in advance of the
economic activity.
Roughly Coincidental Indicators: These are the indicators that reach their peaks and
the troughs at approximately the same time as the economy.
Lagging. Indicators: These are time series data of variables that lag behind in their
consequence vis-a-vis the economy. That is, these reach their turning points after
economy has already reached its own.
Indicator approach is quite useful in suggesting the direction of a change in the
aggregate economic activity. However, it tells nothing about the magnitude of
change. In developed countries, data relating to various indicators are published at
short intervals For example, U.S. Department of Commerce publishes data regarding
various indicators in each of the following categories:
Leading Indicators
• Average weekly hours of manufacturing production workers.
• Average weekly initial unemployment claims
• Contracts and orders for plant and machinery
• Index of S&P stock prices
16 • Money supply (M2)
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Economy and Industry
• Change in sensitive material prices Analyses
• Change in manufacturer's unfilled orders ( durable goods industries) • Index
of consumer expectations
Coincidental Indicators:
• Index of industrial production
• Manufacturing and trade sales
• Employment on non-agricultural payrolls
• Personal income less transfer payments
Lagging Indicators
• Average duration of unemployment
• Ratio of manufacturing and trade inventories to sales
• Average prime rate
• Commercial and industrial loans outstanding
• Chang in consumer price index for service.
The above list is not exhaustive. It is only illustrative of various indicators used by
investors. A word of caution would not be out of place here as forecasting based
solely on leading indicators in hazardous business. One should be quite careful in
using them. In any case, there are practical difficulties in operationalizing it as data
collection is not done well in advance. There is always a delay in it, with the result
that interpretation even if correctly performed can not be fruitfully utilized. Further,
problems with regards to their interpretation as well exits. Various indicators under
broad category of leading indicators, its various measuring may give conflicting
signals in terms of future direction of the economy.

To overcome these limitations, the use of diffusion index or composite index had
been suggested. This takes care of the problems by combining several indicators into
one index in order to measure the strength or weaknesses in the movement of a
particular kind of indicators. Care has to be exercised even in this case because
diffusion indices are not without problems either. Apart from the fact that its
computations are difficulties, it does not eliminate the irregular movements in the
series. Despite these limitations, indicators approach/ diffusion index can be a useful
tool in the hands of a skillful forecaster.

Money and Stock price

It is widely recognized that money supply in the economy plays a crucial part in the
investment decision making. The rate of change in the money supply in the economy
affects the GNP, corporate profits, interest rates and stock prices. Accordingly,
monetarists argue that total money supply in the economy and its rate of change play
an important part in influencing that stock price. Too much money in the economy, it
is argued, fuels the inflation. And as investment in the stock is considered as hedge
against inflation, stock price increases during inflationary times. The relevance of
economy analysis and some economic indicators is well illustrated in a newspaper
report as reproduced in Box 6.1.

6.7.3 Econometric Model Building Approach

This is another approach in determining the precise relationship between the
dependent and the Independent variables. In fact, econometrics is a discipline where
in application of mathematics and statistical techniques is made to economic theory.
It presupposes the precise and clear relationship between the dependent and
independent variables. One of such well-defined relationship with its attendant
assumptions rest with analyst. Thus by using econometrics, the analyst is able to
forecast a variable more precisely than by any other approach. But forecasts thus
derived would be as good as the data inputs used and assumptions made. 17
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Securities Market in Opportunistic Model Building or GNP Model Building or Sectional Analysis is
India frequently used in practice and is most eclectic method. It borrows from the methods
discussed earlier. It uses national accounting framework in order to achieve short-term
forecasts. Various steps while using this approach are:
1) Hypothesize the total demand in the economy as measured by its total income
(GNP) based on likely scenarios in the country like war, peace, political
instability, economic changes level and rate of inflation, etc.
2) Forecast the GNP figure by estimating the levels of its various components like:
Consumption expenditure
• Gross private domestic investment
• Government purchases of goods and services.
• Net exports.
3) After forecasting the individual components of GNP, the analyst adds them up
and get a figure of the forecasted GNP.
4) The analyst compares total of GNP so arrived with an independently arrived at, a
priori. Forecast of GNP and test, the overall forecast for internal consistency.
This is done to ensure that both his total forecast and subcomponents' forecast
make sense and fit together in reasonable manner.
Thus opportunistic model building involves all the details described above with a vast
amount of judgment and inequity.

Activity-1

a) Distinguish between leading and lagging indicators.

…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………….

b) List out six indicators, which you consider useful to know the future direction
of Indian economy. Also, classify them, into leading, coincidental and lagging
indicators.

…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………....

c) Examine Table 6.1 to 6.5 and Figure 6.1 to 6.3. Updated the table with the
current values. Based on this examination, how do you assess the future
outlook of the economy?

…………………………………………………………………………………
…………………………………………………………………………………
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…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
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18 ………………………………………………………………………………….
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Economy and Industry
Box 6.1 Analyses
ECOMONY WITNESS BULLISH TRENDS
Mudar Patherya
After having been a devout pessimist for the last two years. I must confess that I
am shedding my ideology. I am turning a bull. The reasons for this
metamorphosis are to be found more in the fundamentals of the economy than in
the stock market. Take the sales of automobiles in the first quarter of the current
financial year as a yardstick. Maruti Udyog has reported sales of 33680 vehicles
in the domestic market in the first three months of 1993-94. "We are going at full
stretch now." Says R.C.Bahargave, managing director of Maruti Udyog. We sold
around 1.28 lakh vehicles in the last financial year and our target of the current
year is in excess of 1.50 lakh vehicles. After years of plateauing out, and our target
to be a substantial jump in sales for the current financial year. The demand for cars
is a good indicator of the economy land by this index. I can say that the economy
has turned around. In fact, Maruti hardly has any inventory and even if the
company has an additional in built capacity of 20per cent, we would have been
able to clean out our inventory without a problem. In fact, today we do not even
need to push sales of the vehicles. The vehicles are moving themselves".
Maruti's turnaround is not an isolated instance. Hindustan motor is also talking in
terms of a negligible inventory. A Calcutta based dealer said recently: "When the
company, announced that it would be raising its monthly target to 1900 vehicles
in March, no one took the company seriously. When the company announced
that it would be raising its output to 2100 for April, a number of people took them
sceptically. Today, Hind Motors has a monthly output of 2600 vehicles, there is
no inventory with the company or the dealers, there is a premium on the cars and
there is two months waiting list. In fact, we are having to go to the company with a
request for a additional five cars per month".
BULLISH: If the turnover was only in automobiles, the theory of the country's
economic turnaround could still have been debated. However industries are also
turning strongly bullish. Take polyester yam for example. Over the last few
months there has been a strong increase in the off take of fabric which, in turn, has
resulted in demand overtaking supply of yam. As a result of this imbalance, yarn
prices have been strengthening consistently over the last few months, the latest
being of Rs. 4 per kilo increase in early August. Not surprisingly companies like
Sanghi Polyester, DCL, Polyester and Haryana Petro have become the fancied
darlings of the stock market.
Or take the case of fibers for example. For long written off a leper industry due
to the mounting losses sustained by it as well as the poor capacity utilization
levels. Negligible additional capacity was created in the country for
manufacturing polyester staple fibers. Because of the increase in the domestic
consumption and export of blended fabrics and blended yarn (Poly viscose and
Poly cotton) fiber demand had ballooned and even reached a stage when users are
being told that there will be no supplies for the next couple of months. Suddenly,
the cash turnaround of companies like Orissa Synthetic and India Polyfibers has
became a reality.
Or lastly come to colour picture tubes. Samtel colour reported a loss of Rs 8.91
Crores in 1992-93 (8 months) but faces the prospects of sharply revived 1993-
94. The basis is a projected increase in the consumption of colour picture tubes
form 8.3 lakh numbers in 1992-93 to around 11 lakh numbers in the current
financial year. What is interesting is that this is indicative of the turnaround in the
electronic industry as a whole, leading to improved prospects for a number of
related companies. What has accounted for this suddenly-revived economy? One
of the answers is definitely the cut in customs duties and corresponding
reduction in excise which has helped to reduced the cost structure of a number of
products. This has made a number of products cheaper in the domestic market
and expanded the base for them in the process.
FUTURE SCENARIO: What of the future? The scenario could emerge strongly
bullish if the cut in import duty in the finished product is accompanied by a cut in 19
the import tariff for the raw material as well,
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Securities Market in
India Besides, the excise component would have to be lowered as well, resulting in an
expansion of demand within the country. Once this transpires. More goods will be
sold, the recession will be history and if installed capacities fall short of meeting the
demand, we could even have a temporary shortage in certain areas on our hands.

Given this is scenario, only the stubborn would continue to be bearish. It is the
times perhaps to cover our shorts on the sensex and place all our big chips on the
shares of Polyester companies. Stock of DCL polyester, Sanghi Polyester and
Harayan Petro look cheap when viewed against projected 1993-94 earning. With the
festive season round the bend, the buoyancy in yam prices is expected to continue,
giving investors a sharp turn around for the first half of the current financial year.

Source: TOI, August 9, 1993

6.8 INDUSTRY ANALYSIS

After conducting analysis of the economy and identifying the direction it is likely to
take in the short, intermediate and long term, the analyst must look into various sectors
of the economy in terms of various industries. An industry is a homogenous group of
companies. That is, companies with the similar characteristic can be grouped into one
industrial group. There are many other bases on which grouping of companies can be
done. For example, traditional classification is generally done product wise like
pharmaceutical, cotton, textile, synthetic fiber industry, etc. Such a classification
though useful does not help much in investment decision making. Some of the more
useful bases for classifying industries from the investment decision point of view are as
follows:
Growth industry: This is the industry, which is expected to grow persistently and its
growth is likely to exceed the average growth of the economy.
Cyclical industry: In this category of the industry, the firms included are those which
move closely with that rate of industrial growth of the economy and fluctuate cyclically
as the economy fluctuates.
Defensive industry: It is a grouping that includes firms which move steadily with the
economy and decline less than the average decline of the economy in a cyclical
downturn.
Declining industry: This is that category of firms, which either generally decline
absolutely or grow less than the average growth of the economy.
Another useful criterion to classify industries is the various stages of their development.
Industries with different stages of their life cycle development exhibit different
characteristics. In fact, each development stage is unique. Grouping firms with similar
characteristics of development helps investors to properly evaluate different investment
opportunities in the companies. Basing on the stage in the life cycle, industries may be
classified as follows:
Pioneer's Stage: This is the first stage in the industrial life cycle of a new industry.
Being the first stage, the technology and its products are relatively new and have not
reached a stage of perfection. Experimentation is the order both in product and
technology. However, there is a demand for its products in the market, thereby, the
profit opportunities are in plenty. This is a stage where the venture capitalists take a lot
of interest and enter the industry and sometimes organize the business. At this stage,
the risk of many firms being out of the industry is also more; hence, mortality rate is
very high in the industry, with the result that if an industry withstands the risk of being
out of the market, the investors would reap the rewards substantially or else substantial
risk of loss of investment exist. A very pertinent example of this stage of industry in
India was leasing industry which was trying to come-up during mid eighties. There was
a mushroom growth of companies in this period. Hundreds of companies came into
existence. Initially, lease rental charged by them was very high. But as the competition
grew among firms, lease rental reduced and come down to a level where it became
difficult for a number of companies to survive. This period saw many companies that
could not survive the onslaught of competition. Only those which tolerate this
20 onslaught of price war could remain in the industry. Leasing industry today in India is
much pruned compared to mid-eighties.
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Economy and Industry
Fast growing stage: This is the second stage when the chaotic competition and Analyses
growth that were the hallmark of the first stage is more or less over. Firms that could
not survive this onslaught have already died down. The surviving large firms now
dominate the industry. The demand for its products still grows faster in the market
leading to an increase in profits to the companies. This is the stage where companies
grow orderly and rapidly. These companies provide a good investment opportunity to
the investors. In fact, as the firms during this stage of development grow faster, they
sometimes break the records in various areas like payments of dividends, etc, thus
becoming more and more attractive for investments.

Maturity and stabilization stage: This third stage where industries grow roughly at the
rate of the economy and are fully developed to reach a stage of stabilization. Looked
at differently, this is a stage where the ability of the industry to grow appears to have
more or less lost. As compared to the competitive industries, rate of growth in the
industry in slower. Sales may still be rising, but at a lower rate. It is at this stage that
the industry is facing the problem of what Grodinsky called "latent obsolescence" a
term used to describe a situation where earliest signs of decline has emerged.
Investors have to be very cautions to examine and interpret these signs before it is too
late.

Relative Decline stage: The fourth stage of industrial life cycle development is the
relative decline stage. Industry at this stage has grown old. New products and new
technology have come in the market. Customers have changed their habits, styles,
liking, etc. Its products are not much in demand as was in the earlier stages. Still, the
industry can continue to exist for some more time. Consequently, the industry would
grow less than the average growth of the economy during the best of the times of the
economy. But as it expected, the industry would decline much faster than the decline
of the economy in the worst of times.

The specific characteristics of different stages of life cycle development of industries

have a number of implications for investment decision. For example, Pioneering
stage is very risky stage. As you know that risk and returns are positively correlated,
investment at this .stage is quite rewarding. However, for an investor looking for
steady long-term returns with risk aversion, it is suggested that he should in general
avoid investing at this stage. These are good for venture capitalists. But if he is still
keen to invest, he should try to diversify or disperse his investment in companies that
are in the second stage of development i.e., fast growth. This probably explains the
prevalent higher stock prices of the companies of this industry.

From the investment point of view, selection of the industries at the third stage of
development is quite crucial as it is the future growth of the industry that is relevant
and not its past performance. There are a number of examples where the share prices
of companies in a decline industry have been artificially hiked up in the market. This
is justified on the basis of good record of its performance. But the fact of the matter is
that a company in a declining industry would sooner or later feel the pinch of its
features and an investor investing in companies at this stage would experience
reduction in the value of his investment in due course.

After having discussed various investment implications, it may be pointed out that
one should be careful while using this classification. This is because the above
discussion assumes that the investor would be able to identify various stages in the
industry life cycle. In practice, it is a very difficult proposition to detect which stage
of development an industry is at a given point of time. Needless to say, it is only a
general framework that is presented above and he can use it for meaningful analysis
with suitable modifications. In order to strengthen the analysis further, it is essential
to study the unique feature of the industry in detail. Due to its unique characteristics,
unless the specifi. industry is studied properly and in depth with regard to these, it
will be very difficult to form an opinion for profitable investment opportunities.
Given below are some of the features that could be considered for a detailed
investigation while selecting an industry for investment. These features broadly relate 21
to the operational and structural aspects of the industry.
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Securities Market in i) State of Competition in the industry
India
Competition is a way of life that increases, as barriers to enter the industry are
loosened/ removed. It is an important input in investment decision making. Knowing
about the state of competition in a particular industry, therefore, is a must. Questions
those are relevant in this context are:
• Which firm in the industry plays a leadership role and how firms compete
among themselves?
• How is the competition among domestic and foreign firms both in the
domestic and the foreign markets? How do the domestic firms perform there?
• Which type of products are manufactured in this industry? Are these
homogenous in nature or highly differentiated?
• What is the nature and prospect of demand for the industry? This may also
incorporate the analysis of classifying major markets of its products:
customer-wise and geographical area-wise, identifying various determinants
of the demands of its products, and assessing the likely demand scenarios in
the short, intermediate and long run.
• Which type of industry is it: growth, cyclical, defensive or relative decline
industry?
ii) Cost conditions and profitability
The worth of a share depends on its return and the return depends on profitability of
the company. Interestingly growth is an essential variable but its mere presence does
not guarantee profitability. Profitability depends upon the state of competition
prevalent in the industry, cost control measure adopted by its constituent units and the
growth in demand for its products. While conducting an analysis from the point of
view of cost and profitability, some relevant aspects to be investigated are:
• How is the cost allocation done among various heads like raw materials,
wages and overheads?
Knowledge about the distribution of costs under various heads is very essential
as this gives an idea to the investors about the controllability of costs. Some
industries have overhead costs much higher than others. Likewise, labour
cost is another area that requires close scrutiny. This is because finally
whether labour is cheap or expansive depends on the wage level and labour
productivity is taken into account.
• Price of the product of the industry.
• Capacity of production-installed, used, unused, etc.
• Level of capital expenditure required to maintain or increase the productive
efficiency of the industry.
Profitability is another area that calls for a thorough analysis on the part of investors.
This requires a thorough analysis on the part of investors. No industry can survive in
the long run if is not making profits. This requires a thorough investigation into various
aspects of profitability. However, such an analysis can being by having a bird's eye
view of the situation. In this context ratio has been found quite useful. Some of the
important ratios often used are:
• Gross Profit Margin ratio
• Operation Profit Margin ratio
• Rate of Return on Equity
• Rate of Return of Total Capital

22 Ratios are not an end in themselves. But they do indicate possible areas for further
investigation.
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Economy and Industry
iii) Technology and Research Analyses
Due to increase in competition in general, technology and research play a crucial part
in the growth and survival of a particular industry. However, technology itself is
subject to change; sometimes, very fast, leading to obsolescence. Thus only those
industries which are updating themselves in the field of technology could have a
competitive advantage over others in terms of the quality, pricing of products, etc.
The relevant questions to be probed further by the analyst in the respect could include
the following:
• What is the nature and type of technology used in the industry?
• Are there any expected changes in the technology in terms of offering new
products in the market leading to increase in sales?
• What has been the relationship of capital expenditure and the sales over
time? Whether more capital expenditure has led to increase in sales or not?
• What has been the amount of money spent on the research and development
activities of the firm? Does the amount on the research and development in
the industry relate to its redundancy and long run?
• What is the assessment of this industry in terms of its sales and profitability
in the short, intermediate and long run.
The impact of all these factors have to be finally translated in terms of two most
crucial numbers i.e., sales and profitability - their level and expected rate of change
during short, intermediate and long run.
6.8.1 Techniques of industry analysis
Up till now, we have discussed about various factors that are to be taken into account
while conducting industry analysis. Now we turn our attention to various techniques
that helps us evaluate that factors mentioned above:
End Use and Regression Analysis: It is the process whereby the analysis or investor
attempts to diagnose the factors that determine the demand for the output of the
industry. This is also known as end-use or product-demand analysis. In this process,
the investor hopes to uncover the factors that explain the demand. Some of the factors
found to be powerful in explaining the demand for the industry are: GNP, disposable
income, per capita, consumption, price elasticity techniques like regression analysis
and correlation have been often used. These help to identify the important
factors/variables. However, one should be aware of their limitations.
Inputs Output Analysis: This analysis helps us understand demand analysis in
greater detail. Input output analysis is very useful technique that reflects the flow of
good and services through the economy. This analysis includes intermediate steps in
the production process as the good proceed from the raw material stage through final
consumption. This information is reflected in the input-output table reflects the
pattern of consumption at all stages- not just at the final stage of consumption of final
goods. This is done to detect any changing pattern or trends that might indicate the
growth or decline of industries.
Activity-2
Tick the right answer:
1. Cyclical industry is cyclical in divided payout. True / False
2. Defensive industry is like automobile industry. True / False
3. A profitable investment opportunity lies in a matured and stable industry.
True / False
4. Competition exists in all walks of life. Investments is no exception,
so why bother about it. True / False
5. Anticipatory surveys being simple technique can be relied solely for
forecasting industry variables. True / False 23
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Securities Market in Table 6.6: Index Numbers of Industrial Production
India
Year Mining Manufacturing Electricity General
& Quarrying
Base : 1980-81=100
Weight 11.46 77.11 11.43 100.00
1981-82 117.7 107.9 110.2 109.3
1982-83 132.3 109.4 116.5 112.8
1983-84 147.8 115.6 125.4 120.4
1984-85 160.9 124.8 140.4 130.7
1985-86 167.5 136.9 152.4 142.1
1986-87 177.9 149.7 168.1 155.1
1987-88 184.6 161.5 181.0 166.4
1988-89 199.1 175.6 198.2 180.9
1989-90 211.6 190.7 219.7 196.4
1990-91 221.2 207.8 236.8 212.6
1991-92 222.5 206.2 257.0 213.9
1992-93 223.7 210.7 269.9 218.9
1993-94 231.5 223.5 290.0 232.0
1994-95 248.8 245.4 314.6 253.7
1995-96 267.3 278.8 340.1 284.5
1996-97 268.4 302.8 353.4 304.6
1997-98 281.5 313.7 377.6 317.3
Base : 1993-94=100
Weight 10.47 79.36 10.17 100.00
1997-98 126.4 142.5 130.0 139.5
1998-99 125.4 148.8 138.4 145.2
1999-00 126.7 159.4 148.5 154.9
2000-01 131.4 167.9 154.4 162.7

6.9 SUMMARY
In this Unit, we have discussed the relevance of economy and industry analysis for
equity investment decision and introduced the economy-industry-company framework
of fundamental analysis. We have also noted the usefulness of fundamental analysis in
efficient market set up. This Unit also explains that nature of economy analysis and
discusses economic forecasting techniques viz., anticipatory surveys, barometric or
indicators approach and the econometric model building approach. As part of industry
analysis, it is pointed out that more than product wise classification, life cycle stage-
wise classification of industries is more useful for equity investment decisions making.
This Unit concludes by introducing techniques of industry analysis viz., end or
regression analysis and input-output analysis. In the next Unit, we will move forward to
discuss company specific analysis to give a complete understanding on fundamental
approach.

6.10 SELF-ASSESSMENT QUESTIONS/EXERCISES

1) Define `Fundamental Analysis'. Bring out its relevance for equity investment
decision.

2) Discuss the relevance of fundamental analysis in efficient market set up.

`
3) Economic-Industry-Company (EIC) framework provides a useful approach to
equity investments decision'. Explain and illustrate.

4) `Economic forecasting is the heart of economy analysis'. Comment and briefly

24 explain various techniques of economic forecasting.
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Economy and Industry
5) Define `industry analysis' and bring out its relevance for selecting equity shares Analyses
for investments.
6) `Fundamental analysis is application only in the hands of institutional
investors. Individual investors would find it too time taking and costly to adopt'
- Critically examine the above statement.
7) Please read `Economy witness bullish trends' as given in the Unit and answer
the following questions:
a) What are the indicators of bullish trends?
b) How would you classify these indicators?
c) Do you agree with recommendation made by the author of this unit?
8) Write short notes on the following:
(a) Economy Analysis
(b) Industry Analysis
(c) Techniques of Economic Forecasting
(d) Anticipatory Surveys.
(e) Econometric Model Building Approach.
6.11 FURTHER READINGS
Amling, f., 1984, Investment -An Introduction to Analysis and Management, 5th ed.
PHI. New Delhi.
Fischer, D.E. and RJ Jordan 1995, Security Analysis and Portfolio Management, 6th
ed. PHI, New Delhi.

25